Construction industry’s growth slows

Lisa Pradhan

4 years ago

Experts have predicted downward growth for the US construction industry for what remains of 2013 and the coming year. Although residential construction continues to grow, commercial construction is lagging.

According to construction consultancy FMI’s latest Construction Outlook report, the revised growth figure for total construction in all sectors is 6% for 2013, a drop of 3% from 2012. However, it expects the growth rate to return to 7% in 2014 and hit $977.1 billion.

Factors affecting slowdown

The decline in public construction and expectations of more cuts as sequestration continues

Lenders still strict with their lending criteria

Consumers remain cautious about increasing their debt load

Residential construction industry is playing catch up

Growing interest rates might be a deterrent, but the current residential growth, if sustainable, can lead to a rise in non-residential construction. Image by Wikimedia Commons.

The growth rate in residential construction might go down to 12% in 2014. Before the housing bubble burst in 2006, spending in the residential segment was $619.8 billion, as compared to $338.2 billion for 2013.

This explains the current high growth rates; they’re created by a “catch-up” mode – people who had postponed buying houses are now beginning to buy residential property. Once expenditure approaches 2006 levels, growth will taper off.

“Over the longer term, we remain confident in the logic of the housing recovery because the trend rate of household formation implies a need for roughly 1.5m new homes per year, well above the current level of housing starts,” says Devid Mericle, US economist at Goldman Sachs.

Private non-residential construction to grow slowly

Hotel, retail, office, and industrial construction comprise private, non-residential construction. As retail sales improve, commercial construction is set for a 2% increase in 2013 and is expected to show a 5%+ increase in 2014. As many companies combine in-store sales with Internet sales, smaller stores are likely to be built.

Office construction is slated to grow by 2% in 2013. As companies with higher profits look to grow, new office space is in demand. “Everybody seems to be hitching their wagons to the revival of the home-building industry to revive the economy, but let’s not forget non-residential construction because it’s also very important,” says Brian Jacobsen, chief portfolio strategist at Wells Fargo Advantage Funds.

The American Institute of Architects estimates the 2014 growth of non-residential construction at 7.6%. This is slower, compared to FHI’s prediction of a 12% rise in residential construction next year. According to Kermit Baker, chief economist for the American Institute of Architects, the slower growth of non-residential construction could be because design and building can take many years, so investors need to be sure a robust recovery is happening before they start a project.

Institutional non-residential construction growth is sluggish

Institutional non-residential construction, which comprises religious, healthcare facilities, education, and amusement/recreation construction has dropped even more in demand than private non-residential construction.

Healthcare is expected to grow 6% in 2014, as baby-boomers retire in increasing numbers.

In the educational sector, budget cuts for government spending at all levels will lead to an overall construction drop of 4% in 2013. Construction in this sector might see a 4% growth in 2014 as residential construction picks up in many parts of the country.

“If a close connection between the two existed in the past — say a lag of 16 months after residential picks up, nonresidential is sure to grow — this is not true today,” report some FMI 3rd Quarter Nonresidential Construction Index panelists.

Usually, a rise in residential construction leads to the rise of non-residential construction as house owners buy new products to furnish their new homes. This generates demand for more manufacturing.

However, with so much manufacturing now being done overseas, the trend is ending. Forecasts say that the purchasing power of homeowners might not have the same impact on U.S. non-residential construction as before.

Officials urge policy makers to prioritize infrastructure

The Associated General Contractors of America (AGCA) states that even though private residential and non-residential construction growth has increased, there is a decline in public spending.

Association officials have urged policymakers in Washington to make infrastructure investment a top federal priority and enact federal spending bills before funding runs out at the end of September.

Officials warn that the lack of funding, for even a short while, will significantly disrupt construction schedules for infrastructure and building projects.

“Shutting down a project, even for a day, can be very damaging to finishing it on time and keeping key workers on board. Congress and the administration shouldn’t play chicken with vitally needed infrastructure,” says Stephen E. Sandherr, the association’s chief executive officer.